Cryptocurrency derivatives? You bet. This trader has 295% return

Jay Smith has little doubt the cryptocurrency market will crash. The price of bitcoin has increased sixfold in the past year, despite a 25 per cent plunge this month triggered by China’s crackdown on digital tokens. Not a week goes by without startups launching new ones to fund everything from dentistry to Las Vegas strip clubs. Even Paris Hilton is tweeting to her 16 million followers about her cryptocurrency investments. If that isn’t a jump-the-shark-moment, what is?

Yet Smith, the No. 1 cryptocurrency trader at online brokerage eToro, shrugs all that off as he plays the markets from his home in Basingstoke, a suburban town west of London. Every day he looks for reasons to buy more bitcoins and other digital tokens. He doesn’t have much information to size up the prospects of Blackmoon Crypto, Steem and other coins that have caught his eye, but that’s cool with Smith, a high school dropout. His portfolio is up 295 per cent in the past 12 months.

Smith isn’t playing with just his own cash. More than 9,000 retail investors heed his advice and copy his trades on eToro. The firm is one of several that use contracts for difference, or CFDs, derivatives that allow investors to speculate on the price of cryptocurrencies. Unlike futures contracts, CFDs don’t trade on exchanges and are largely illiquid. Investors can suffer big losses because they have to put up only a percentage of the value of their trades on margin. While the US  largely prohibits retail investors from trading CFDs, regulators in Europe are only now beginning to address the perils they pose.

An easygoing man with the air of someone dazed by his luck, Smith dropped out of school at 14. Soon enough Smith was day-trading tech stocks and then bitcoin. He started buying dozens of them at $25 each. Smith rode out the currency’s first big crash in 2013, when it lost half its value in less than three weeks. By early 2017, he’d built a portfolio of coins . 

“We have to put a stop to this. This is selling a synthetic instrument on top of another synthetic instrument. This is the highest form of speculation,” said Rainer Lenz, chairman of Finance Watch, a  public-interest organisation.